Page 219 - AFM Integrated Workbook STUDENT S18-J19

Hedging interest rate risk

Hedging interest rate risk

1.1 Types of risk exposure

 On existing loans or Exposed to changes in interest rates if existing loans
deposits and deposits have variable interest rates.

Can avoid by using fixed rates or using swaps

 On future loans or Even if we want to use fixed rates, we do not know what
deposits the rate will be when we need the loan/deposit.

1.2 Internal Methods

 Smoothing Company has a balance between its fixed rate and
floating rate borrowing.

Natural hedge against changes in interest rates.

 Matching The company matches its assets and liabilities to have
a common interest rate (e.g. loan and investment both
have floating rates).

 Netting The company aggregates all positions, both assets and
liabilities, to determine its net exposure.

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